Key Takeaways: Scale-up M&A Panel – Acquirees

On April 1st, I had the privilege to host the first of two successive weeks of Invest Ottawa M&A panel discussions for Scale-up CEOS, this one relating to being acquired (click here for the recap on acquiring). The panelists were all accomplished Ottawa-area entrepreneurs:

• Dale Gantous, formerly CEO and Founder of InGenius Software (acquired by Upland Software, Oct 2019);
• Dr. Suhayya Abu-Hakima, formerly CEO of Amika Mobile (acquired by Genasys, Oct 2020); and
• Samer Forzley, formerly CEO of Simutech Multimedia (acquired by TPC Training, Aug 2020).

These entrepreneurs have a wealth of experience to share based on their experience, with five exits of varying sizes amongst them. Some of the key points and trends these exceptional entrepreneurs found to be key to their successful exits are outlined below.

Lay the Groundwork Early

Company sale processes can take years of advance planning and execution. As efforts are being undertaken to ensure the company has its internal house in order, it is also important to establish the company’s reputation and attractiveness in the market and with potential acquirers. One useful approach mentioned in this regard is to create a prioritized target map of the ecosystem and the top potential acquirers. With this in hand, the CEO will want to establish connections with those companies, whether it be at industry conferences, referrals or through direct outreach. Ideally, one will form multiple partnerships, all of whom may express an interest in acquiring the company when the time is right. And even with all of that effort, it is still possible in some cases that an investment banker outreach process may turn up a new and unexpected buyer.

Document Impeccably

One of the most-repeated and emphasized themes was the criticality of fully preparing for the upcoming sale process and transaction. There were multiple mentions of the value of transforming the business (from one-time project services to recurring revenue, for example) or even hiring an advisor a few years in advance to ensure impeccable business practices are in place, utilizing CRM or other systems to keep all documentation in order, and ensuring top-notch financials to make the business easy to understand for potential investors. Creating and instilling a continuous discipline around maintaining these documents will help accelerate the transaction process and will eliminate any uncertainty regarding seller disorganization.

Know Your Value

Selling company CEOs will want to understand what acquirers will value in their businesses, and also what may detract from that value. In some cases where there is high technical complexity, a portfolio of issued patents may either have inherent value to the acquirer, or at least enhance credibility for the seller. In other cases, it may not be the intellectual property itself but rather industry awards that have enhanced the seller’s reputation in the market and help facilitate their sales cycles. And in yet other cases, it may be that the seller’s capabilities complement the acquiring company’s offering to enable cross-sell, up-sell, to access a new market, to acquire talent in an emerging area, or for economies of scale and cost synergies.

That being said, CEOs will also want to be aware of, and ideally mitigate, potential detractors to that value, or areas that may cause friction in the sale process. For example, if it is expected that the selling company’s technology stack will be retained and it is not mainstream, it can cause concern for acquirers in terms of retaining and finding development talent to maintain and build on the application. Generally, think through any potential issues – outstanding litigation, employee or shareholder claims, patent infringement claims, financial irregularities – that may exist and seek to resolve them prior to engaging in a sale process.

Over-prepare for Due Diligence

Acquisition due diligence is one of the most intense periods of scrutiny that company CEOs ever go through. Navigating it smoothly and in a responsive manner will increase the buyer’s confidence, and keep the sale process on track to a close. Ideally, the CEO will have all the documentation fully prepared. Realistically, there are always unexpected issues that arise and need to be addressed openly and swiftly; specific examples include differing accounting treatments, regulatory developments, legal challenges, and defecting customers to name a few. Identifying and coming up with scenario plans and contingencies will go a long way to preserving the value of the company in the negotiation.

Interestingly, the COVID-19 pandemic has had a mixed impact. On the one hand, it can delay deal closings due to the entire process, including due diligence, being executed remotely. On the other hand, the now widespread acceptance of and reliance on web meetings has enabled access to a greater pool of potential buyers, can enable more participants in the due diligence process, and in the cases of SaaS businesses, may actually improve the business’s results.

Drive for the Close

Time is the enemy of sales deals, and nowhere is that more true than when you are selling your company. A company sale process has been called “a job on top of a job”, with the CEO and selected members of the Board, leadership team and advisors preparing for, presenting the company, and addressing acquirer questions and concerns as quickly and effectively as possible to maintain momentum in the process. Adding to the burden for CEOs accustomed to being open and transparent with their teams is that they may not be able to do so, partly to not cause undue concern with the team but especially so in the case where you are working with a public company acquirer where regulatory provisions prohibit premature disclosure.

Top Tips

At the end of the session, each of the former CEOs provided their top pieces of advice for any entrepreneur that may go down the path of getting acquired:

• Dale Gantous: hire experienced advisors to help you prepare your company for the process; establish formalized reviews; and hire an investment banker if your company is large enough.
• Dr. Sue Abu-Hakima: use a CRM (like salesforce.com) to help properly organize your documents; establish proper financial reporting standards from the start; and ensure that you have satisfied customers to vouch for your products.
• Samer Forzley: find friends in the space and develop partnerships that could result in prospective acquirers; invest the time – typically it will take multiple months – to ensure your company’s documentation is in order prior to starting a sale process.

Overall, a company sale process is a lengthy and challenging process. It is essential to plan your sale well in advance. A good guideline timeframe would be 3 months for planning, 3 months for outreach, and 3 months for due diligence. And for the CEO in particular, it can be an emotional roller coaster given the weight of responsibility they feel for the company, team and investors. Issues will arise that can potentially derail the entire process, and it is incumbent upon the CEO to be fully prepared, professionally and psychologically, and to maintain an optimistic and solution-oriented outlook with a focus on closing the deal.

If you are an Ottawa-area founder or CEO, feel free to reach out to me, Invest Ottawa or any of the CEO panelists if you are starting to think about selling your company.